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What's Driving Tesla's Open Source Gambit?

Should a car be treated like a piece of software? That is essentially what Elon Musk, CEO of Tesla Motors, has done. The billionaire, who made his fortune by co-founding and selling PayPal, recently dropped a bombshell on the automotive industry: In the spirit of the “open source” movement, he announced this month that Tesla would share patents that cover its revolutionary electric vehicles for free.

“Tesla Motors was created to accelerate the advent of sustainable transport,” Musk wrote in a June 12 blog post, strangely titled, “All Our Patent Are Belong To You.” “If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal.” Musk added that Tesla would not sue anyone who uses the patents in “good faith.”

The move is significant. Tesla’s vehicles are known for traveling three times farther on a single battery charge than many other electric cars on the market. Other proprietary technology includes the company’s cooling and safety systems, environmental durability, motor design and software. At the end of 2013, Tesla held 203 patents and had more than 280 more pending globally, according to a filing with the U.S. Securities and Exchange Commission.

BMW, Nissan and Mahindra reportedly are taking a look at the Silicon Valley car company’s patents. Will Tesla’s decision to share its crown jewels jumpstart the electric vehicle market, or will it end up hurting the company by speeding up innovation at rival car companies? Wharton faculty and other experts welcome Tesla’s desire to encourage innovation, but they also note that Musk’s offer is less generous than it looks.

“I commend Tesla for this action. In many domains, the patent system is an impediment to innovation,” says Karl Ulrich, Wharton’s vice dean of innovation and professor of operations and information management. But Tesla’s offer is not particularly substantial. “I don’t believe Tesla is giving up much of substance here,” he notes. “Their patents most likely did not actually protect against others creating similar vehicles.”

When it comes to engineered, assembled goods, Ulrich says, patents rarely protect intellectual property as competitors find ways to work around them. Instead, patents become “ammunition in the arsenals of big companies, which they can use to bully smaller companies with the threat of litigation,” he adds. “With rare exceptions, big technology-based companies amass patent portfolios as strategic deterrence against infringement claims by their rivals.… Tesla is essentially deciding it doesn’t want to spend money litigating patents, which is a great decision for its shareholders and for society.”

Tesla’s initiative also is not technically “open source,” Ulrich notes. “If Tesla were truly going open source, it would publish the engineering documentation for its vehicles. That would be disclosing a great deal more than the patents do.” Instead, Tesla is providing a free license to use its patents. “Intrinsic to the patent system is the idea that the patent must teach the invention to the rest of the world. That information was already available,” he says.

Tesla’s first vehicle, the Tesla Roadster, debuted in 2008 and debunked stereotypes about how an all-electric car would look and perform. The two-seat convertible zoomed from zero to 60 miles per hour in 3.7 seconds and could travel as fast as 120 miles per hour. It had a range of up to 245 miles on a single charge, according to the company’s SEC filing.

Tesla’s latest, the four-door luxury sedan Model S, hit the market in 2012. It goes from 0 to 60 mph in 4.2 seconds and can travel up to 265 miles per charge. That compares to 84 miles for the Nissan Leaf, the most popular U.S. electric car. The Mitsubishi i-MiEV clocks in at 62 miles while the Ford Focus Electric lasts up to 76 miles, according to the U.S. Energy Department.

“[Tesla] backed up its ambitious rhetoric with products that have proven to be really excellent,” says John Paul MacDuffie, a professor of management at Wharton. But Tesla’s distinctiveness goes beyond battery performance and speed. The company is so meticulous that it even obsesses over every vehicle’s paint job.

In a 2013 documentary that aired on the National Geographic Channel, Tesla disclosed that its signature red paint is infused with glass flakes so it would sparkle. Indeed, one engineer says Tesla wants its paint jobs to look like a piano finish. Cars are inspected on a bamboo platform because Tesla believes that one can only see beauty framed against beauty, the documentary says.

The Model S is a refinement of the Roadster. The five-passenger vehicle has door handles that retract automatically into its groove. There are virtually no buttons in the console of the car. Instead, the driver uses a 17-inch tablet to do everything from opening the glass roof to customizing interior temperature. The car’s battery is a long, flat piece of hardware that attaches to the floor, so there is storage space under the hood and the trunk. There is space for two rear-facing child seats as well.

In 2013, the Model S was named “Motor Trend Car of the Year” and also garnered the highest rating ever from Consumer Reports of 99 out of 100. MacDuffie says he has not seen such high marks before: “The Model S has gotten really superb reviews.” Tesla made 2,500 Roadsters in 2012 when it stopped production; the goal is to deliver 35,000 Model S cars this year, according to the company’s SEC filing. MacDuffie describes Tesla as an “Apple-like” company due to the excitement it generates about its hardware, software, design aesthetic and social values.

While Tesla vehicles outperform rivals, they are pricey: the Model S costs from $62,400 to $72,400 including a federal tax credit of $7,500. There is a performance model priced at $85,900. Coming later this year is the Model X, which will sport the roominess of a minivan and the styling of an SUV. A less-expensive vehicle, the Gen III, also is under development. Tesla has set a goal of 2017 for the production of a mass-market electric vehicle. Compared to Tesla, Nissan Leaf comes in at a much more affordable $29,000 to $35,000 before credits.

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